25-06-2021 09:00

How to finance growth for Small & Medium sized Enterprises?

Nordea’s Trade and Working Capital team return to their Working Capital Report 2020, this time from the perspective of SMEs (Small & Medium sized Enterprises) to assess their challenges with financing growth and investments and to suggest alternative solutions for funding growth if there is a shortage of capital.

In the Nordea’s Trade and Working Capital team’s recently published ‘Working Capital Report 2020‘,one of the key findings was that companies with a higher market capitalisation had a higher Return On Capital Employed (ROCE). It was also evident that the companies with higher returns and market cap displayed a more efficient use of working capital, measured as working capital in relation to sales.

For companies with a lower market cap, the situation was the opposite, returns were lower and working capital levels higher. In addition, the trend displayed deteriorating returns and working capital levels over the last five years (between 2015 and 2019).

These findings raised several questions which we hope to examine in more detail and within this article, we have taken another approach by grouping companies according to size of sales instead of size of market cap as was the case with the Working Capital Report.

Key findings

  • Publicly traded Small & Medium sized Enterprises (SMEs) yield lower returns than larger companies, hampered by less efficient use of working capital
  • Publicly traded SMEs (except for the smallest category) show growth rates at a level with larger companies, but with less support from external financing (Bank financing)
  • The majority of SMEs find it problematic to raise bank financing to finance growth and investments and therefore need to a larger extent rely on their self-generated cash flow or their owners for equity injections
  • We find that the scarcity of capital for SMEs might hamper growth for many companies but also suggest alternative solutions to obtain necessary capital to support growth
    • Today there are available solutions for SMEs to become more self-financing, where various solutions for receivables financing offer fast, easy and accessible possibilities. These furnish SMEs with the opportunity to unlock cash in accounts receivables, by receiving cash for issued invoices and to use this cash for growth and investments
    • For SMEs with an exporting feature to their business, there is also the ability to raise the necessary capital with the support of a credit guarantee from a domestic state owned Export Credit Agency (ECA). The risk coverage attained with the credit guarantee enables banks to provide companies with the possibility for invoice discounting and / or to set-up an overdraft facility

Small & Medium sized Enterprises (SMEs) have a lower return and less efficient use of working capital

When the sample of more than 9,500 publicly traded companies is grouped according to size of sales, the picture displayed is very similar to the one where market caps were used as the categorisation – smaller companies, whether categorised after sales size or market cap, have a lower return and as the graph on the right displays, the return increases with size.

The graph also displays the clear correlation between ROCE and NWC/Sales, the lower NWC/ Sales companies show the higher ROCE it yields. Returns for companies in the range <50m to EUR 100m is below 4% in return whereas the NWC/Sales is above 17%.

Do you have a growth or financing problem?

As displayed in the graph to the right, except for the absolute smallest category (<50m) the 50m-100m and 100m – 500m display high growth, at a median of approximately 6 and 8% respectively. In order to fund growth, companies require capital, preferably from self-generated cash flow or secondly, from an external source, e.g., debt funding or as an equity injection.

We have previously seen that smaller companies yield lower returns and are less efficient in their use of working capital. That is not good for the self-generated / operating cash flow. At the same time smaller companies, as displayed in the graph, have very moderate leverage, displaying a problem for smaller companies to obtain external financing. The last solution for cash for many smaller companies seems to be obtaining equity injections from their owners, but in many cases companies, or the management of the companies, hesitate to ask their owners for continuous equity injections.

The data in this report is on publicly traded companies, whereas the vast majority of SMEs are privately owned companies. For private owned companies, the possibility to obtain capital are in many cases even more slim than for the publicly traded ones, with the effect of capital and financing being an even scarcer resource.

Do you get your budget to add up?

The graph to the right displays a summarised view of a fictive company’s in- and outflow of cash over the course of a year, the “Sources and Uses of cash”. The column on the left hand side in the graph depicts the “Sources of cash” a company can attain. In this example the operating cash flow part is the largest source of cash (cash generated by the company within its business operations). The other two sources that might be available for companies are Debt issuance (loans from banks) and Equity injections (funds from owner/s). On the right hand side, the column depicts the “Uses” of cash, where in this example the largest use of cash is for Capex (capital expenditure).

The key thing here is of course that both sides shall be of the same sizes / amounts, the two columns should add up. If, for example, “Uses” are higher than “Sources”, then the company has a problem as the company will run into a shortage of cash. Then some things need to be sacrificed. The company may not be able to do the amount of Capex required to increase production, or maybe the company needs to sacrifice a new deal with a customer due to long payment terms, and with shortage of cash, they can’t afford to wait for payment.

For companies, the ability to raise capital is key to bridging gaps between in- and outflows of cash and to making the necessary capital expenditure and investments. For companies where capital and cash is too of a scarce resource the company’s ability to seize business opportunities and grow might be hampered.

Houston, we have a problem!

The Swedish Federation of Business Owners (Företagarna in Swedish) is the largest business organisation in Sweden representing the interests of around 60,000 business owners. In its yearly report concerning companies’ prospect of raising financing the organisation points out that raising financing is one of the greatest challenges for growing companies and for investments¹.

The graph on the right-hand side is taken from the same report and it depicts that 68% of companies that had made an investment during the last 12 months found difficulties in raising bank financing (where 24% found it “Very difficult” and 44% “Rather difficult”). The number has increased steeply since 2019 which probably is caused by the uncertainty in the business environment following the Covid-19 pandemic. The long trend is also that companies perceive it to become more difficult and the probable explanation is that banks have been, and continuously are, imposed by higher capital requirements and thereby requiring more securities to offer bank loans². The same concerns are raised in other Nordic countries and organisations, e.g., in Denmark by The Danish Construction Association (Dansk Byggeri in Danish) in its yearly report “The economic environment barometer”³.

Another Swedish organisation for companies, the Confederation of Swedish Enterprise (Svenskt Näringsliv in Swedish), points out Small and Medium sized companies (SMEs) within Trade and Manufacturing industries as the two industries who are probably affected most negatively and hence having most difficulties in raising bank financing. A reason for this is according to the report that companies within these industries have less ability to raise financing without having any strong collateral. With no strong collateral banks might consider these SMEs too risky and therefore non-bankable⁴.

Finally, what can SMEs do!

All is not lost! The organisations above propose a couple of solutions in order to make it easier to raise financing for SMEs. Two suggestions that we found the most interesting are “Alternative fintech solutions” and “Shortened payment terms” from customers.

Legislating about shortened payment terms might be a great solution at first sight and especially when looking at the graph to the right which shows that payment terms from customers to smaller companies are longer than for larger companies. But in practice it is more complicated as companies operate in a competitive environment and payment terms is a term and condition up for business negotiation, same as for price and other conditions. It should also be taken into consideration that many companies operate on an international market and that payment terms differ significantly in various parts of the world.

The reason for selecting the suggestions of “Alternative fintech solutions” and “Shortened payment terms” is of the possibility of today to combine the two for a viable and practical solution for companies to run operations in a more capital efficient manner and in order to improve operating cash flow in “Sources and Uses”. By doing this a company can improve its self-financing. This would in turn make the company less dependent on external financing for its daily operations and enable cash release, which can be used for e.g., growth, capex and investments.

A third alternative for SMEs, with an exporting feature in its business, to raise necessary capital is with a credit guarantee, where a bank shares the risk with a domestic state owned Export Credit Agency (ECA) (EKF in Denmark, Finnvera in Finland, GIEK in Norway and EKN in Sweden). The Nordic ECAs can cover a percentage of the risk and thereby making it more attractive for a bank to lend out money to a company. The support and risk coverage the Nordic ECAs can offer differs between the four Nordic ECAs, but all include risk coverage which enables banks to provide companies with the possibility for invoice discounting and / or to set-up an overdraft facility.

Nordea offers various types of solutions based on your business

Over the last couple of years, Fintechs have enabled solution providers to fine tune their offerings to make them more accessible for SMEs. It is of course inevitable that smaller companies often trade in smaller volumes than larger companies, but they still often trade with a high complexity. For example, smaller companies, especially in the Nordics, clearly view their market as global, but being a small player in an international market may have its obstacles.

Receivables Finance

Receivables Finance offers a fast, easy and accessible way for SMEs to unlock the cash in their accounts receivables, by receiving cash for issued invoices. This is not a loan; it is essentially the liquidation of an asset to produce ready cash. For the accounts receivable to be considered a viable asset the risk on the buyer should of course be bankable. In many cases SMEs are suppliers to larger companies and as depicted previously, banks have often a larger risk appetite on large, strong companies. Nordea has a full variety of receivable finance solutions for different kinds of companies. We help your company to free up capital tied up as accounts receivable. Flexibility and intelligent services are common features for all of them.


Nordea is a founding partner of we.trade, a new trading platform with a solid backbone of 10+ leading European banks. The we.trade platform is built on the latest version of the IBM Blockchain Platform utilising blockchain technology to provide traders with easy access to financing and logistics. The Invoice Financing product on the Platform allows the seller to request finance from its bank, based on the invoice that the buyer has accepted via the we.trade platform, in a transparent and secured environment.

ECA covered risk

In many cases, if your company has exporting feature in your business, Nordea is also able to support your company in close cooperation with your domestic ECA. The ECA provides coverage of risk and enables Nordea to provide your company with the necessary funding and risk management.

Explore further the we.trade platformNordea’s Receivables Finance and the various solutions that can be provided in cooperation with ECAs in DenmarkFinlandSweden and Norway. Reach out to Nordea to discuss how we can support your company’ value creation and growth.

For more information please write to Henrik at henrik.anbelin [at] nordea.com (henrik[dot]anbelin[at]nordea[dot]com).



1. ¹Företagarna, Företagarnas finansieringsrapport 2021, Mars 2021, page 6.

2. ²Företagarna: Företagarnas finansieringsrapport 2021, Mars 2021, page 10

3. ³https://www.dst.dk/da/Statistik/emner/erhvervslivet-paa-tvaers/konjunkturbarometre/bygge-og-anlaegsvirksomhed-konjunkturbarometer

4. ⁴Svenskt Näringsliv, Bankregleringen och företagens kreditmöjligheter, November 2019, page 26